LOral S.A.

is a French cosmetics manufacturer, headquartered in Clichy, France, and is currently the world's largest
cosmetics manufacturer , followed closely by companies such as Unilever, Procter & Gamble and Este Lauder .
However, LOral focus exclusively on beauty and personal care, as opposed to main competitors, Procter & Gamble and
Unilever, which are not only involved in beauty and personal care, but also in home care.
The company was founded by a young French chemist, Eugne Schueller. Schueller had already started a small commercial
business called Aurole in 1907, which produced hair care products , purchased by Parisian hairdressers. In 1908, he
patented the product and, in 1909, founded his company Socit Franaise des Teintures Inoffensives pour Cheveux . In
1939, the company simply became known as LOral .
LORAL The Product
L'Oral has an extensive range of beauty products and cosmetics, such as colour cosmetics, skin care, hair care, mens
grooming, fragrances and sun care, with some products catered towards specific markets and cultures.
LOrals Professional Products, with its number one brand Krastase, build the luxury hair care segment.
The division Consumer Products aims to cater for all corners of the world with their best innovations of cosmetic produce,
and the products - colouring, hair care, makeup and skincare - are distributed through mass retailing channels.
LOral Luxe products are available not only in cosmetic and department stores, but also in their own-brand boutiques and
committed online stores, which built LOrals luxury division.
With the acquisition of The Body Shop in 2006 , which had a reputation for natural products and ethical values, LOral
pledged to incorporate some 21st-century values, defending the environment, fair trading, and social responsibility . The
Body Shop is currently operating in more than 60 countries, with over 2,800 stores. But due to their stance on animal rights,
legal aspects impeded The Body Shop from establishing itself on the Chinese market.
L'Orals opportunities on an emerging market
There are several reasons for companies entering emerging markets. The main reasons being the increased market share and
a certainty of increased financial gains. The list below is a non-exhaustive enumeration of reasons why entering an emerging
market is a great opportunity for L'Oral.
Strengthen the companys market portfolio
Gain access to the local markets and to the local capital
Take advantage of where the growth is today and for the foreseeable future
Expand the companys footprint in the skin care and hair care segments
LOral would benefit from an expansion in China, as it is expected that by 2016 China will have overtaken the
US in regards to purchasing power.
6. Access to the growth opportunities is invaluable for LOral in regards to their comparatively narrow focus.
7. Gain confidence with domestic customers while expanding to an emerging market
8. Meet the customers demand for affordable beauty and personal care products
9. The company could utilize the young working age populations of most emerging markets, and keep the retired
population from government run workhouses.
10. Currency appreciation may add to the value of doing business in a different country, alongside lower taxation rates
on capital
1.
2.
3.
4.
5.

External Environmental Analysis

Compared to Western markets, the Chinese market is vastly different. To highlight this, a PESTLE analysis will be
undertaken. This will define the environment which L'Oral is to operate in, while highlighting critical operational factors.
2.1. Political Environment Analysis
Chinas political system is a major factor to be taken into account when entering this market. As one of few socialist
countries, it publicly aligns itself with communism.
The "socialist market economy" concept was first recorded in the party statutes, and later in March 1993, was included in the
Chinese Constitution. Finally, in March 1999, it was further clarified with constitutional amendments added (Federal
Foreign Office. Despite both human rights violations and socio-political issues, China is deemed politically stable.

2.2. Economic Environment Analysis

Extensive economic and social reforms were announced in November 2013 by the Central Committee of the Communist
Party of China. These reforms are to be phased in over time, and fully implemented by 2020. If successful, the financial
sector will become liberalised. The role of the market should be bolstered as a result, as will the private sector (Federal
Foreign Office of the Federal Republic of Germany, 2014). Additionally, as a partner in the ASEAN Free Trade Area, China
has created positive investment conditions.
2.3. Social Environment Analysis
There are social implications and consequences involved if western companies choose to sell their products in China, or
outsource production there. It is imperative for success that western companies understand the culture of the Chinese market.
In order to attain a level of insurance for success in China, "Guanxi" - meaning relationships - is a concept that must be
embraced. Connections are vital in China. The level of connections, or networking, that a western company has in China is
directly linked to how successfully disputes regarding contractual agreements are resolved. Depending on whether the
western company is actually selling products in China or just outsourcing production determines the amount of
"Guanxiwang" (social networking) required; selling in China requires a high level of Guanxiwang, outsourcing requires less.
Another value to be considered is "Mianzi". This is a vital agreement which means a western company must not lose face,
nor allow the Chinese partners to lose face.
Chinese mentality and behaviour in business have been moulded by its traditional historic culture. A western company must
not view China as one single market, due to resilient regional differences. Family security is very important for the Chinese.
Workers are driven to constantly find better jobs and opportunities ).
Recruitment, localisation and retention of staff are now top priority for companies in China. L'Oral, with 3000 people in
China, say that staff turnover in its marketing department is approximately 15%. A lot of fresh graduates leave. We lose
almost all we hire in the first three years, says Daisy Dai, L'Orals human-resources director .
Consequences of these social implications mean that LOral must:

Provide health cover for its employees, which is aligned with best practice
Provide financial protection for all employees if unexpected life events, such as incapacity or permanent disability,
occur.
Continuously provide training to employees due to high retention or turnover
Adapt its company structure according to Chinese culture

2.4. Technological Environment Analysis

China presents great technological opportunities, particularly due to its growing "tech savvy" population . The LOreal
Group has a developed online shopping system on its official website, and also at www.luxurybeauty.com, fitting perfectly
with Chinas increasing online shopping habits, providing greater opportunities .
2.5. Legal Environment Analysis
Taxes for importing cosmetics are a factor to be considered. At present there is:

Import tariff at 6.5%,

VAT at 17% equal to home grown companies, and
Consumption tax at 30% for eleven types of beauty products such as eye and lip make-up preparation.

From a legal point of view, there would be nothing to stop LOral from entering Chinas market.
2.6. Environmental Analysis
.
LOrals ambition is to:

Reduce CO2 emissions at their plants and distribution centres by 60%, from a 2005 baseline.
Reduce their water consumption by 60% per finished product unit, from a 2005 baseline.
Reduce waste by 60% per finished product unit, from a 2005 baseline.
Send zero waste to landfill.
Reduce CO2 emissions from transportation of products by 20 % per finished product unit from a 2011 baseline.

L'Oral will be operating on the Environmental and Social implications. The issues surrounding environmental protection
have become increasingly important in recent years as the implications of under-regulated economic activity are seen today.
The major current environmental issues in China are: air pollution from over-reliance on coal, water shortages, water
pollution from untreated wastes, deforestation, a 20% loss of agricultural land since 1949, and desertification. Deforestation
has been a major contributor to Chinas most significant natural disaster, flooding.
Chinas national CO2 emissions are among the highest in the world and increasing annually. The CO2 emissions in 1991
were estimated at 2.4 billion tons. By 2000, that level, according to United Nations (UN) statistics, had increased by 16% to
nearly 2.8 billion tons. LOral is taking the necessary measures to address these issues.
Strengths

The Executive Vice President of Research and Innovation, Laurent Attal, stated that Research has always been at
the heart of LOral's growth, with three major drivers of innovation: active ingredients, formulation, evaluation .
LOrals Research & Innovation model is based on three areas : (1) Advanced Research, (2) Applied Research
and (3) Development.

LOral continually concentrates on increasing their market share. To increase market share in hair care and
skincare, LOral launched its own line called LOral Paris .

4.2.

To ensure delivery of their products, LOral relies on an efficient supply chain management service. As quality
and meeting deadlines are key to success in China, it is vital to have the right supply chain partner.
Weaknesses
In China, LOrals hair care has not taken off as planned, losing out to Unilever and P&G. In January 2014,
LOral announced the pulling of the Garnier brand from mainland China, the brand accounting for only 1% of
LOrals 2012 sales . This highlighted a significant need to refocus the market strategy.

With a continual need for innovation, LOral also has very high R&D costs. For example, in a presumed attempt
to improve hair care sales in China, they spent three years studying Chinese hair types in order to develop a hair
care range specific to the culture . The constant investment warrants a high risk of failure.

The companys organisational structure by divisions is very much decentralised, with LOral owning an extensive
range of brands such as Essie, Urban Decay, Maybelline, Diesel Fragrance, Kiehls and
Biotherm. Owning so many brands means that LOral rely on third party retailers, and the lack of centralised
structure makes the company more difficult to control, with a slower rate of production .

In order to overcome these weaknesses, it might be advisable for LOral to refocus their strategy on marketing skin care
products. And in order to reduce R&D costs, they could look for new markets in developing countries so that new R&D
ventures are not necessary.
Also, given that it would be incredibly difficult for LOral to centralize, they could consider organising authority of
brands and divisions according to the geography of the company, accelerating production and decision processes .

4.3.

Opportunities
The cosmetics industry is going from strength to strength, with a higher customer demand every year. Innovation
is an immense opportunity for L'Oral as products and services expand, with a niche market for organic and
natural cosmetics.

L'Oral is aware that globally the consumer is attracted to anti-wrinkle products, skin pigmentation products,
skincare etc. This is a promising market, expanding constantly as the population ages .

LOreals advanced research, applied research and product development, enabled the creation of technological
successes like Fructis. Each stage has its own unique functions to perform in order to create successful innovations
.

LOral Paris recently launched their Makeup Genius app. The app allows the potential consumer to test the
products virtually using a smart phone, with realistic results. Consumers from all corners of the world can now try
L'Oral products. The consumer can place an order for the virtually tested product(s) and save time, with no need
to leave the home .

The company is one step ahead of its competitor in market share, thanks to the large patents registered by the
company .

In order to take full advantage of the opportunities, L'Oral should focus on enhancing and developing existing products in
order to gain a bigger market share.

4.4.

Threats
Competition is rising in emerging markets. Rivalry is becoming more intense with new competitors, but L'Oral
continues excel in terms of expansion, with Este Lauder and Coty both targeting China . L'Oral is also
facing competition from Proctor & Gamble in the skin care market in China.

Economic adversity has been at the forefront of most business decisions in recent years. The debt crisis in the Euro
zone has darkened economic forecasts, while at the same time emerging markets, such as China, are reportedly
cooling dow.

Fluctuating exchange rates between the Euro and Chinese Yuan may pose a threat with potential loss of profit
margin.

4.5.
Conclusion
Strengths and opportunities outweigh the weaknesses and threats. L'Orals main strength is their constant research and
innovation, enabling them to remain the market leader despite strong competition.
Their decentralized divisional organizational structure may be considered their leading weakness. L'Orals ability to
capitalize on opportunities may be rewarded with increasing profits and decreasing costs.

L'Oral should prepare for the threats that the future may hold, threats that every company may face e.g. economic crisis,
economic downfall and changes in market demand. All of these threats require continuous monitoring and evaluation.

Communications problems in Chinas working environment

China has a collectivist culture that emphasises commitments between individuals and organizations. The Chinese obey
group values and initiatives. Hierarchy is important. Top managers of small groups are backed up by the collectivist culture.
10.1. Hierarchical Power Structure
Chinese management systems consist of authorities that are centralized in directive and hierarchical structures as a result of
the high power distance and paternalistic culture.
China has a bureaucratic and arbitrary organizational culture. The manager has complete power, meaning he cannot be
challenged by a subordinate who will not defend themselves against power abuse. The manager makes the important
decisions, while the staff do not feel comfortable with decision-making. Chinese leaders would rarely consult a
knowledgeable subordinate, which can cause of lot of difficulties and leads to project failure.
For the hierarchy management organization, information is power. Communication of valuable information is meticulously
protected, and is considered a personal asset to maintain power.
10.2. Uncertainty Tolerance
The Chinese are a secretive society, expressing themselves indirectly and ambiguously, unlike Europeans, who would be
accustomed to direct and explicit communication. In China, people would be expected to read between the lines in a
discussion. Indirect communication is more diplomatic. This is crucial in order to avoid losing face in public and
maintaining manager power, as it cannot be challenged by an individual of lower rank.
10.3. Intuitive Decision Making
The Chinese would generally make decisions based on comparison, expert management judgement, and instinct, even for the
most critical problem. Therefore, the decision-making actions are quick and involve minimal participants.

However, in the West, decisions would be made based on investigation and logical knowledge gathered through impartial
qualitative and quantitative processes .
10.4. Possible Solutions for Communication Problems
The best possible approach to the issues listed above is adaptation, as it involves less time to manage than other
strategies.The adaptation process should start at recruitment level, by ensuring that the potential candidate has knowledge of
the local language, culture and the type of communication problems which employees might face in the Chinese work
environment).
To educate and train managers to face these possible communication problems, LOral has put in place a special
management development programme for 6 to 18 months (depending on the country) to ensure a successful career within the
company. LOrals Management Trainee Programme helps young managers to learn about LOrals various posts and
work environment .
11. Control issues for LOrals overseas operations
The special control issues LOral face in China include:

High Labour costs

Air Pollution

As mentioned in section 6.4, LOral struggle to retain graduates. When the graduates leave the organisation, this results in
higher training and human resource costs, with immense quality control troubles .
One way of retaining graduates is to offer one year graduate programmes (Management Trainee Scheme as LOreal calls
them), such as supply chain, and commerce & marketing , potentially reducing HR costs and improving the quality of the
workforce.
Around two-thirds of Earths greenhouse gases are a consequence of burning of coal and petroleum. With the Chinese
economy expanding, the country now burns more coal than Japan, Europe and the USA combined .
In 2003, LOreal unveiled a scheme to combat the effects of pollution on skin and hair .
Measures to be adopted to ensure a long-term co-operative relationship
For LOral to ensure a long-term co-operative relationship there must be mutual trust, and a combination of cooperation,
coordination and collaboration. Trust is a key measure of business-to-business relationships that LOral can adopt, as trust
enables co-operative behaviour, promotes improved relationships, reduces harmful conflict and allows effective response in
a crisis , both parties acting in the best interest of the business. Trust requires risk , uncertainty, interdependence and choice
as essential conditions to establish a long term co-operative relationship.
Along with trust, there must be a combination of cooperation, coordination and collaboration. This behaviour is defined as a
comprehensive work to bring resources to a necessary relationship in order to achieve efficient operations in harmony with
the objectives of the parties . With low trust and a low combination of cooperative, coordinative and collaborative behaviour,
there is no chance to ensure a long term cooperative relationship as the atmosphere will promote defence and protectiveness
Conclusions
Therefore, it is clear that LOral can plausibly enter the emerging market of China, as there is a significant demand for the
wide variety of produce and brands they produce. As discretionary income increases in China, LOral is set to profit more
than ever before. Also, the company would largely benefit from increased market share and a certainty of enhanced financial
gains, while strengthening their market portfolio. With LOral promoting the creation of regional eco-systems in Asia
through the purchase of local raw materials, they have supported a boost in economic growth. The continual regional
research and development demonstrate a willingness to increase their understanding of local preferences, going as far as
developing a hair care range specific to Chinese hair type.
Having conducted a PESTEL analysis, it is clear that the conditions for the company are more than favourable with little risk
economically and politically, although it is noteworthy that political tensions have been on the rise throughout 2014, with the
country seemingly favouring national business. Sociological factors in China are a challenge, yet one that LOral have

acknowledged, having regard for the importance placed on family values, honour and keeping face. The Hofstede model
provides a valuable insight as to what is to be expected in the work environment.
While facing threats, such as market rivalry and subsequent buyer power, LOral has many strengths and opportunities
which outweigh these risks and propel them forward.
Although there is no shortage of distributors, suppliers and work force in China, they can be notoriously difficult to manage,
from the theft of trademarks and the pirating of goods, to a difficulty to retain staff for more than three years. This is an
important consideration for the future of the company, and LOral has started a programme called LOral and me, with
the intention of increasing employee relations with management, giving them more control over career development while
keeping the future of the company in mind. This is a direct example of the companys functional organisational structure, a
complex and sophisticated structure, which actively promotes diversity in culture, skills and experience across brands,
developing highly diverse teams. Motivational and communication systems are consistently being developed and addressed,
in order to develop and view the long- term success of the company.
With China having the third largest cosmetic trade in the world, LOral has already triumphed through both luxury and
mass brands. Given the companys intensive local R&D focus, and the importance they place on cultural issues, LOral has
been well received, both politically and by consumers. They should continually assess and address potential government and
community concerns, which is conducive to remaining in a favourable position.